In Canada, the Registered Retirement Savings Plan (RRSP) is a highly effective way to save for retirement, offering tax benefits that help your investments grow faster. However, an RRSP can also serve as a valuable tool in times of financial need, allowing you to borrow from your RRSP under specific circumstances. While RRSPs are generally intended for long-term savings, the Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP) enable Canadians to withdraw funds tax-free under certain conditions. Below, we explore the two key methods available for borrowing from your RRSP, along with a detailed explanation of how they work and what you need to consider.
What is the Home Buyers’ Plan (HBP)?
The Home Buyers’ Plan (HBP) is a federal program that allows first-time homebuyers to withdraw from their RRSP to buy or build a home. The main advantage of the HBP is that the funds you withdraw are tax-free as long as they are repaid within 15 years.
Eligibility for the HBP
To qualify for the Home Buyer’s Plan, you must meet specific eligibility criteria:
- You must be considered a first-time homebuyer, which means you or your spouse/common-law partner have not owned a home in the past four years.
- You must have a written agreement to buy or build a qualifying home.
- You must intend to live in the home within one year of buying or building it.
- Your RRSP must have been in place for at least 90 days before the withdrawal.
How Much Can You Withdraw?
Under the HBP, you can withdraw up to $35,000 from your RRSP to finance the purchase or construction of your home. If you and your spouse are both eligible, you can each withdraw up to $35,000, for a combined total of $70,000.
Repayment of HBP
Once you have borrowed from your RRSP under the HBP, you are required to repay the amount over 15 years. Each year, you must repay at least 1/15th of the total amount borrowed, beginning two years after the withdrawal. If you fail to make the minimum repayment in any given year, the amount you didn’t repay will be included in your taxable income for that year.
Advantages and Disadvantages of HBP
Advantages:
- Tax-free withdrawal: No taxes are withheld on the withdrawal, making it an interest-free loan.
- Repayment flexibility: The 15-year repayment period offers flexibility, and you can repay the amount earlier if you choose.
- No impact on RRSP contribution limit: You can continue contributing to your RRSP while repaying the HBP.
Disadvantages:
- Missed investment growth: When you withdraw funds from your RRSP, you miss out on potential tax-sheltered growth.
- Repayment requirement: If you fail to make the required repayments, you will face tax consequences.
What is the Lifelong Learning Plan (LLP)?
The Lifelong Learning Plan (LLP) allows individuals to withdraw from their RRSP to finance full-time education or training for themselves or their spouse/common-law partner. This plan is designed to help Canadians further their education without incurring tax penalties on their RRSP withdrawals.
Eligibility for the LLP
To qualify for the LLP, you must meet the following criteria:
- You must be enrolled in a full-time educational program at a designated educational institution. Part-time students may qualify if they have a disability.
- The educational program must last at least three consecutive months, and you must spend at least 10 hours per week on courses or work in the program.
- Your RRSP must have been in place for at least 90 days before the withdrawal.
How Much Can You Withdraw?
Under the LLP, you can withdraw up to $10,000 per year from your RRSP, with a maximum total withdrawal of $20,000 over four years. The LLP can be used multiple times throughout your life, provided you meet the conditions each time.
Repayment of LLP
Repayments under the LLP must begin in the fifth year after your first withdrawal or earlier if you stop studying. The total amount withdrawn must be repaid within 10 years, with at least 1/10th of the total withdrawn repaid each year. If you do not repay the required amount in a given year, it will be included in your income for tax purposes.
Advantages and Disadvantages of LLP
Advantages:
- Tax-free withdrawal: Like the HBP, withdrawals under the LLP are not taxed as long as they are repaid.
- Flexible repayment terms: You have up to 10 years to repay the withdrawn amount, offering flexibility in managing your finances.
Disadvantages:
- Limited withdrawal amount: The maximum withdrawal of $20,000 may not cover the full cost of tuition and related expenses.
- Missed investment growth: Similar to the HBP, withdrawing from your RRSP means you will miss out on potential tax-sheltered investment growth during the repayment period.
Borrowing from Your RRSP Outside of HBP and LLP
In most cases, borrowing from your RRSP for other purposes will trigger taxes. Any withdrawal outside of the Home Buyers’ Plan or Lifelong Learning Plan will be treated as taxable income in the year it is withdrawn. Additionally, financial institutions are required to withhold a percentage of the withdrawal amount as a tax. The percentage varies depending on the amount withdrawn and ranges from 10% to 30%.
It’s important to note that while RRSP loans are technically allowed, they come with tax implications and may not be the most advantageous option unless you qualify for the HBP or LLP.
Withholding Tax on RRSP Withdrawals
When you withdraw from your RRSP outside of the HBP or LLP, the withholding tax is as follows:
- 10% on withdrawals of $5,000 or less.
- 20% on withdrawals between $5,001 and $15,000.
- 30% on withdrawals of $15,001 or more.
This withholding tax is applied upfront, but you may still owe additional taxes when you file your income tax return depending on your total income for the year.
Is It a Good Idea to Borrow from Your RRSP?
While borrowing from your RRSP can provide a short-term solution to financial needs, it’s essential to weigh the pros and cons carefully. Withdrawing funds means losing out on tax-deferred investment growth, which can significantly impact your retirement savings over time. Additionally, failing to repay the amount under the HBP or LLP could result in a hefty tax bill, reducing the benefits of borrowing from your RRSP.
For most individuals, RRSPs are best left untouched until retirement. However, in specific situations—such as buying your first home or going back to school—the HBP and LLP offer valuable opportunities to access your savings without immediate tax consequences.
Conclusion
Borrowing from your RRSP through the Home Buyers’ Plan or Lifelong Learning Plan provides a tax-efficient way to use your retirement savings for important life events. While both programs offer flexibility, it’s crucial to understand the repayment requirements and potential impact on your long-term retirement goals. Before borrowing from your RRSP, consider consulting a financial advisor to ensure you make the best decision for your future.